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Question

Based on your answers to earlier questions , indicate whether the following statements are true or false: a. In general, the price of a bond rises when the interest rate rises. b. In general, the price of a bond rises when a given sum of money is received sooner rather than later.

Solution

VerifiedAnswered 2 years ago

Answered 2 years ago

Step 1

1 of 2**(a)**

Taking into account the Present Value formula, it can be seen that the price of a bond will decrease when the market interest rate increases. Therefore, the statement will be **false**.

We can observe this since according to the present value formula:

$\begin{aligned} \text{PV} = \frac{R}{(1+r)^t} \end{aligned}$

The interest rate *r*, being in the part of the denominator in the previous formula, will decrease the price of the bond as it is higher.

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